GDP, wealth and the big bad wolf just round the corner

PUBLISHED : Sunday, 21 August, 2016, 12:56am
UPDATED : Sunday, 21 August, 2016, 1:02am

The latest findings of the US-based Wealth –X survey ... show that the world’s billionaires ... were collectively worth US$7.7 trillion, up 5.4 per cent on the previous year. To put this figure in perspective, the 2,473 billionaires placed in this category by Wealth-X collectively own a sum amounting to a shade below half the entire gross domestic product of the world’s biggest economy, the United States.

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That was from my colleague Steve Vines, the voice of common sense when we were both on the board of the Foreign Correspondents Club. I do not dispute what he says here but I think it needs another perspective.

We start with the difficulties of comparing apples to oranges, which is what you do when you compare wealth to gross domestic product.

Wealth is a measure of the total value of your possessions. For this we normally value and stocks, bonds and property at the latest prices for the closest equivalents on their respective markets. Cars and the like are best assessed at what you have to pay to throw them over a cliff as they will otherwise cost your heirs three times their brand new value in probate fees.

Gross domestic product, however, is a measure of how much is spent in any economy, usually over the space of a year, on goods and services plus the capital stock to produce more of them. It has nothing to say about the value of the enterprises that make the goods or offer the services.

HSBC Holdings, for instance, has a current market value of more than HK$1 trillion. That’s the number of shares in issue times the latest share price. But not a cent of it is recognised in the GDP figures. The most that GDP recognises is how much the bank was paid last year for services it rendered.

Obviously then, the wealth of any economy is greater than its gross domestic product. The shareholders of HSBC reckon their wealth as their share of its stock market value, not of its fee and commission income last year.

Likewise, the shareholders of Sun Hung Kai Properties look at its share price, not at how much the company spent on building construction last year, which is what GDP sees.

How much does the difference come to? I don’t know. I suppose some academic somewhere has done a study of what an economy’s wealth is likely to be as a multiple of its GDP but I haven’t seen one. Unlike a listed company’s price earnings ratio (a rough equivalent) I cannot imagine any investment value in the exercise.

But let us say it is something like a multiple of 10 times, which cannot be too far off. In that case, the figure Steve quotes of the world’s billionaires owning just under half the GDP of the US has them owning less than 5 per cent of its wealth. This would be comparing oranges to oranges and apples to apples. It doesn’t look quite so bad any longer.

The other point of perspective needed here is that for more than eight years central banks in the US, Europe and Japan have kept interest rates at near zero in an attempt to stimulate economic growth.

It has not worked. Over-leveraged households are already at their debt limits and industry by and large does not see the growth opportunities that would justify gearing up.

But the exercise has had a hugely stimulating effect on the financial sector. Stock and bond markets are in a state of froth while property prices in many of the world’s cities have gone insane.

All of this inflated value then counts as wealth, which makes me wonder if Steve’s figure of a 5.4 per cent increase in the number of billionaires last year isn’t actually too low.

Take note, however, that the underlying earnings from these investments, the only real support on which they can rest, are flat or declining.

And pretty soon the big bad wolf will come round to the straw home of these little pigs and he’ll huff and he’ll puff and he’ll blow that house down.